At the December meeting of the China-Pakistan Economic Corridor joint coordination committee or JCC, China and Pakistan took steps to retool the CPEC framework.
The two countries agreed that CPEC would now focus on agriculture, industrialization, and socio-economic development. In January, Prime Minister Imran Khan also included the Gwadar Port among CPEC’s priorities going forward.
While all of these elements are more or less part of the original CPEC plan, they have taken precedence over initiating new electricity and infrastructure projects. The reasons: Pakistan’s current account deficit woes and the Pakistan Tehreek-e Insaf emphasis on human development. Another factor: major energy and road projects have been completed or are on the verge of completion.
At the JCC, Beijing and Islamabad agreed to form a new CPEC joint working group on agriculture and convened the joint working group on socio-economic development for the first time. Joint working groups on Gwadar and industrialization already exist.
As I’ll discuss below, the creation of committees won’t magically make CPEC projects materialize. CPEC has provided an ad-hoc vehicle for Pakistan to fast-track energy and infrastructure projects. But when it comes to boosting productivity, the task becomes more complicated as Pakistan must overcome its deficiencies in governance and the uncompetitiveness of its private sector.
Agriculture was identified as one of the seven main cooperation areas in the CPEC long-term plan released in 2017. Some may argue that an emphasis on agriculture is outdated; that the Pakistani economy must look forward and focus on emerging industries.
But agriculture is a critical component of the Pakistani economy. It is the Pakistani economy’s second largest sector, making up around a fifth of GDP. Around two-fifths of Pakistan’s labor market is linked to agriculture. Declining productivity and climate change make the sector’s reform imperative. There is also a major potential upside to reform: it can also help bridge Pakistan’s trade deficit and put the country on a more sustainable growth trajectory.
Pakistan is among the world’s top growers of cotton, rice, and other commodities. Yet yields for many major crops have dropped or remained stagnant over the past three decades. Bangladesh, China, India, and Vietnam now far surpass Pakistan in terms of agricultural productivity. Water resources in Pakistan are also increasingly scarce. Wastage is rampant.
Agricultural exports are dependent on a few water-intensive crops. In FY-2017-18, rice and sugar made up over fifty percent of Pakistan’s food exports, totaling $2.6 billion. They were equalled in value by raw cotton and low value-added products sourced from domestic cotton. Fruits made up just eight percent of total food exports or $400 million. There is a need to shift toward a more diverse range of agricultural exports that use less water and sell for a higher value.
Fortunately for Pakistan, China is a net food importer. And it has made major strides in modernizing its domestic agricultural industry. China can share best practices and technology, make investments, and help Pakistan’s agriculture industry undertake a much-needed transition.
The CPEC agriculture joint working group is expected to meet in the coming weeks. Food production, logistics and processing, and exports will be on the agenda at the upcoming meeting. China’s form of state capitalism and enormous market size make it a unique development partner. It can offer a full spectrum of assistance: from seed technology to road and infrastructure construction to the import of raw and processed goods.
An optimal scenario for Pakistan would look like this: Beijing provides aid for the application of new or contemporary technologies (like drip irrigation); Chinese companies enter into joint ventures with Pakistani counterparts to grow fruits and vegetables and ensure compliance with Chinese regulations; and Beijing facilitates market access for Pakistani goods, reducing tariffs on products that Pakistan can export to China.
China’s overseas investments in agriculture reached $26 billion in 2016. There isn’t a single model of Chinese agricultural aid and investment, as a U.S. Department of Agriculture study demonstrates. In Africa, aid from Beijing has yet to translate into significant imports by China. Latin America, however, is critical to China’s food security.
In Pakistan, China is not heading into uncharted waters. USAID has provided significant aid and investment in Pakistan’s agricultural industry since 2008, yielding modest gains in productivity and diversification. China may have much to learn from both the successes and failures of USAID in Pakistan.
China can also share with Pakistan lessons from the ecological and environmental impact of its three decades of rapid economic growth. Climate change, deforestation, and water management are also on the joint working group’s agenda. China has made major strides in recent years in reversing environmental degradation and adopting sustainable agricultural practices.
A new set of agricultural projects is likely to be funded through the CPEC portfolio. The channelization of an 180km stretch of the Indus River in Sindh could be among them. But for CPEC to transform Pakistan’s agricultural sector, it will have to go far beyond large-scale irrigation projects.
The first stage of CPEC is coming to a close. According to Beijing’s envoy to Islamabad, it will conclude in October 2019.
CPEC has contributed to a surge in electric power generation in Pakistan and improved inter-city road networks leading to warm water ports. But its success will be determined by what Pakistan does with its new infrastructure. CPEC contributed to a surge in Pakistan’s imports, widening the current account deficit. The temporary pain must lead to long-term gain.
Beijing appears aware of that. This month, the Chinese Ambassador in Pakistan Yao Jing said that the next stage of CPEC will focus on investing and buying more from Pakistan. Islamabad has a massive trade deficit with Beijing. Their bilateral free trade agreement (FTA) brought disruption if not destruction to Pakistan’s small and medium enterprises. China is being responsive (at least rhetorically) to the need to fix the disequilibrium in Pakistan’s consumption-driven economy. As negotiations over the next phase of the FTA appear to conclude, we may see whether Beijing is keen on moving beyond symbolic gestures.
Pakistan’s new government is also well aware of the need to boost industrial productivity. Pakistan’s Planning Minister Khusro Bakhtiar declared 2019 the year of industrialization with respect to CPEC.
At the December CPEC JCC meeting, China and Pakistan signed a memorandum of understanding (MOU) on industrial cooperation. The MOU identified textiles, materials, minerals, and petrochemicals as areas of focus. If investments in these areas do materialize, they would be through the CPEC special economic zones or SEZs.
The CPEC SEZs — most of which were proposed before CPEC was launched — continue to face the same difficulties as other Pakistani industrial zones. Most prominent among these are inadequate electricity and gas supplies. According to the chairman of Pakistan’s Board of Investment, none of the planned CPEC and non-CPEC SEZs have available more than ten percent of the electricity and gas supplies provisioned for them. Pakistan continues to face natural gas shortages despite having secured several short-term and long-term LNG supply deals. Public sector mismanagement and corruption are rampant. Merely making the SEZs a priority will not resolve the problems with gas supply.
Also, Pakistan needs to be clear on exactly what purpose the SEZs serve. What is the distinct proposition that they offer as compared to investment elsewhere in Pakistan? What barriers to investment do they overcome?
In China, SEZs served as pockets through which the communist country could begin to transition toward state-controlled capitalism. In Pakistan, industrial zones play a different role. Their primary incentives are assured access to energy and utilities, land and tenancy rights, and exemptions from duties and taxes. They have also served as clusters with location advantages, such as proximity to highways and ports. Industrial estates announced in recent years such as Pakistan Textile City failed to take off because of the lack of access to gas and utilities. Without utilities, these projects are non-starters.
Exemptions offered in SEZs will provoke debate. The Senate Standing Committee on Maritime Affairs recommended that the entire city of Gwadar be made a tax-free zone. However, industrialists from other parts of Pakistan feel such a policy would put them at a disadvantage vis-a-vis Chinese investors, who may have a leg up on investments in Gwadar.
Pakistan is moving forward with groundbreaking for four CPEC SEZs. In the early spring, the Rashakai special economic zone will be launched. In the summer, it will be followed by Dhabeji in Sindh and M-3 in Punjab. Later this year, an information technology-focused SEZ in Islamabad is expected to be inaugurated.
Oddly, Pakistan has asked Saudi Arabia to develop at least two SEZs through CPEC. It doesn’t quite make sense to ask Riyadh to pick among SEZs that are part of a partnership between Beijing and Islamabad. Pakistan has economic zones outside of the CPEC framework. But this could be indication of the looseness of the CPEC branding and the ideas underpinning it.
An underreported outcome of the JCC meeting is Beijing’s apparent pledge to provide $1 billion in development assistance over the next three years to Islamabad. It goes unmentioned in a statement released by the Chinese embassy in Islamabad after the JCC. But the claim was made by a Balochistan provincial minister in December and unnamed officials in a February Voice of America report.
This reflects Beijing’s responsiveness to the priorities of the new government in Islamabad, which has placed human development and social service delivery above infrastructure.
China has paired some of its investments in Pakistan’s poorer regions with goodwill projects, but these have largely been modest given the size of the two countries. Many or most of these projects have effectively been corporate social responsibility projects by Chinese state-owned companies. Beijing will now provide grants that cover “education, health, vocational training, drinking water and poverty alleviation projects.” The program could also include an anti-poverty pilot project.
It appears that Beijing will support socio-economic projects that fall along the CPEC route, beginning in the Gilgit-Baltistan region.
Voice of America reports that China will also deposit $2.5 billion in short-term lending with the State Bank of Pakistan, to shore up Pakistan’s foreign exchange reserves.
In this time of economic difficulty for Pakistan, China is digging in deeper and adapting. It is not stepping back.
It is worth keeping in mind that Chinese state-owned enterprises will be making significant returns on investment from electric power projects in Pakistan, enabled by lucrative electric power rates and incentives guaranteed by Islamabad. While the development aid assistance reflects a change in Beijing’s strategy toward Islamabad, one wonders whether the Pakistani public would be better served by renegotiated electric power rates. Cheaper electricity would lead toward sustainable growth in the power sector, ease the challenge of inter-company arrears, boost the prospects of privatization, and improve the export competitiveness of Pakistani manufacturers.
Will It Be Enough?
CPEC’s fundamental challenge has been that it is ultimately been bereft of a guiding framework. Yes, there is a CPEC “long-term plan” — but it was clearly more notional than instructive.
The long-term plan divided CPEC into three stages. And the heart of it is really in the middle: boosting agricultural and industrial productivity in Pakistan and strengthening economic integration between western China and Pakistan.
But Beijing and Islamabad proceeded with adding projects to the CPEC portfolio before a long-term plan was finalized. They never made clear what was the rationale for including projects within the CPEC portfolio and what type of economic activity would be furthered by the new infrastructure. Little effort was made to align economic and trade policies to support CPEC’s objectives; instead, a deterministic “if you build it, they will come” mindset appeared to guide CPEC planning.
Pakistan, for example, has taken around $2 billion in loans to realign the Karakoram Highway (KKH). It plans on spending at least a billion more on the KKH. But there is no indication that Islamabad figured out a way to make that road pay for itself — for example, through the development of specific industries and trade policies that would result in a meaningful surge in traffic along the route. In fact, it doesn’t appear that a feasibility study has been conducted to determine the potential economic payoff for the new road. And so the realigned KKH, along with CPEC, must be retrofitted with a comprehensive economic plan.
Pakistan’s hands are now tied. As it cuts public sector development spending, a major section of the Karachi-Lahore Motorway is being put on the back burner. This controlled-access, high-speed road connecting Pakistan’s two largest cities — originally expected to be completed by 2020 — will have a gaping hole in the Sindh province stretching from Hyderabad to Sukkur. The Karachi-Lahore Motorway would cut the travel time between the agricultural and industrial centers of Punjab and Pakistan’s two largest ports by forty percent or more. Its benefits would extend to Khyber Pakhtunkhwa and interior Sindh and vastly improve Pakistan as a transit trade route. The loans taken out for the KKH would have been better spent on the Hyderabad to Sukkur road.
Pakistan’s macroeconomic woes have now forced both Beijing and Islamabad to retrofit a plan for CPEC. More than ribbon cutting and roads, the focus now appears to be generating quality economic output, especially exports. But poor decisions made during CPEC’s first stage, are likely to impede the progress of its subsequent stages.
Updates on the China-Pakistan Economic Corridor and Belt and Road Initiative.